A seller or marketing research provider is frequently faced with the challenge of designing an appropriate pricing strategy for a new product or an existing product undergoing change in market conditions. Such a pricing strategy usually requires reliable information on cost and demand. Reliable information on cost is usually readily attainable. Reliable information on the demand function, on the other hand, may not be so readily available. The seller or market researcher may be able to use historical price and volume information, when available, to obtain an estimate of the demand function. However, with new products or existing products undergoing significant changes in the market structure, historical price and volume information is rarely available.
In order to design a pricing strategy for a new product or an existing product undergoing significant change, the seller or marketing research provider might decide to employ a survey or a field test-marketing technique. However, surveys are of limited value in that it is difficult to control the pool of participants, and the participants bear no consequences for their responses. Field test-marketing techniques are very costly to employ and, similarly, are of limited value because of limited experimental control.
Another option that can be used to determine a viable pricing strategy is an econometric analysis of historical market data. In some cases historical market data may exist in the form of bid data from standard auctions. However, econometric analysis of historical market data is also of limited value because there is likely to be limited applicable data and because strong modeling assumptions are needed to identify the underlying demand function under the current market conditions.
One conventional method for estimating the demand function utilizes an analysis of bid data acquired from standard auctions. Attempts to estimate the demand function from bid data acquired from standard auctions have two main disadvantages. First, standard auctions are not necessarily designed and conducted with demand estimation in mind. Therefore, the data from such auctions are rarely ideal for demand estimation. Thus, additional data gathering effort is needed to obtain the information on covariates that are crucial for reliable structural estimation. Also, it is often necessary to make unpalatable behavioral assumptions regarding any inference based on bids from standard auctions. For example, the risk concerns which factor into the bidders' decisions for most standard auctions make it difficult to discern the price that they are truly willing to pay.
Thus, there exists a need for an apparatus and a method for extracting the underlying demand function for new products and for existing products that are subject to new market conditions.